Vietnam mulls PPP Law with sovereign guarantees to reassure investors

Government guarantees are among the 10 points the Ministry of Planning and Investment listed in a document it recently sent to relevant ministries and agencies to collect opinions for its public-private partnership (PPP) bill.

It said the absence of guarantees related to minimum returns and foreign exchange risks have kept investors away from large projects like the Dau Giay – Phan Thiet and Tan Van-Nhon Trach road projects.

Thus, the MPI’s proposal on government guarantees, if approved, might help remove some bottlenecks in the participation of foreign investors in major transport infrastructure projects like the North-South Expressway.

There are signs the Ministry of Finance supports such a proposal. In a report submitted to the government last September, it had said sovereign guarantees are necessary to encourage private investment in PPP projects.

But since they might contravene the Public Investment Law, the State Budget Law and the Law on Public Debt Management, such guarantees should be included in a new PPP law, the ministry had said.

Under the MPI bill, projects considered for minimum revenue guarantees will be those that need National Assembly and prime ministerial approval. The guarantees will be considered on a case-by-case basis.

For projects entitled to guarantees, for the first five years the guaranteed minimum revenue will equal 75 percent of revenue estimated in the contract. It will come down to 65 percent for the following five years.

However, if the revenue exceeds 125 percent of the estimated revenue in the first five years of operation and 135 percent in the following five years, the investor must hand over the excess portion to the government.

The State Bank of Vietnam has said many times it is very difficult to create a foreign exchange guarantee mechanism since the country’s forex reserves are not stably good, in fact warning against issuing foreign exchange guarantees on a large scale.

But in its latest draft, the MPI has sought recommendations from relevant agencies on exchange rate and currency conversion guarantees.

It envisages fixing a cap on exchange rate fluctuations for a certain period of time, for instance five years, and the government compensating the investor if the actual rate exceeds it. The bill also proposes a government guarantee to meet 30-50 percent of investors’ foreign currency requirements.

In a paper released at the Vietnam Business Forum (VBF) last December, Tony Foster, head of the VBF’s Infrastructure Working Group, said there is still no clarity on the mechanism for the state to provide financial viability gap fillers to PPP projects in high-risk sectors such as transport where there is often no offtake agreement to guarantee a revenue stream.

"Without a guaranteed revenue stream, investors and lenders will have no means to assess and manage risks of these projects and will be deterred from participating in PPP projects in these challenging sectors."

Tony also noted that a number of financial issues remain unresolved both in the legal framework and in the actual implementation of projects causing concern to potential lenders, such as narrowing government guarantees on foreign exchange risks and offtake risks, restrictions on the mortgage of land use rights to foreign lenders and taxes on interest on foreign loans.

According to the Ministry of Transport, construction of the eastern section of the North-South Expressway in 2017-2020, which includes eight subprojects in PPP mode, has drawn little interest from foreign investors or creditors.

Agencies responsible for the sub-projects cited foreign investors as saying they would only consider them if there are government guarantees on minimum revenues and foreign exchange.

In a meeting with the Standing Commitee of the National Assembly in late last year, the Government proposed that the PPP Law should be submitted to the legislative body for debate during its working session in May this year and be approved in the following session in October.

PPP is a form of investment between a government agency and a private investor for projects in areas like construction of infrastructure and provision of public services. Through PPP, governments can leverage efficiencies and expertise in the private sector to achieve their development goals.

Fast-growing Vietnam is facing an infrastructure bottleneck. With the state lacking the budgetary might to finance the nation’s much-needed highways, tracks and airports, the Government is increasingly looking towards the private sector to fill in the financial shortfall.

It is estimated that the country needs about $480 billion for infrastructure investment by 2020, but the state budget can only meet one third of the actual financial needs.